There are a number of frequently asked questions when it comes to gifting money, a technique used to share your good fortune and to reduce your federal tax burden.
The IRS rules for gifting are fairly straightforward. Making gifting part of your estate plan can have some significant benefits. The most common questions people have concern how much money they can gift every year and how much they can gift over their lifetimes, what, if any, taxes must be paid on gifts by the giver and what taxes, if any, need to be paid by the recipient. Here’s what you need to know about gifting.
The Newark Advocate’s recent article, “Clarifying gifting tax misconceptions,” explains that in 2017, a person can give up to $14,000 per recipient per year without having to file a Form 709 gift tax return. A married couple may give $14,000 each or $28,000 total per recipient each year.
There aren’t any restrictions on the amount of money that you can give someone. However, if you give more than $14,000 per person, it must be reported as a gift. The giver must file a 709 gift tax return for that year to report the exceeding amount.
A common misunderstanding in this area is that someone has to pay tax on the amount recorded. This is not true. The gift amount simply is counted against and reduces the person’s federal estate tax exemption amount. That amount is $5.49 million per individual in 2017.
Since the gift tax and estate tax exemptions are intermixed, if you gift $1 million over and above the annual gift exclusion amount throughout your lifetime, at your death, your federal estate tax exemption amount would be reduced to $4.49 million. Your estate would have to pay a tax at 40% on the assets above $4.49 million. If, during your lifetime, you use up your $5.49 million gift exemption, you’ll need to pay tax on any additional reportable gifts you make.
Remember, however, that a deceased spouse can pass their unused estate tax exemption to their surviving spouse. As a result, the survivor could have a maximum of $10.98 million of estate tax exemption at death, if it wasn’t previously used up due to taxable gifts reported on the Form 709 return.
It’s not that complicated, as long as you follow the rules. Don’t give more than $14,000 per person per year and you don’t have to file a gift tax return. That way you also don’t have to worry about decreasing your federal estate tax exemption. Finally, no matter how generous you are, the recipient of your gift doesn’t have to pay tax on your gift.
Reference: Newark Advocate (September 24, 2017) “Column: Clarifying gifting tax misconceptions”